Strengthening Security Through the Services Industrial Base 
by David J. Berteau, President and CEO, PSC 

Much is being said and written about the health and resilience of the U.S. defense industrial base. U.S. government assistance to Ukraine has highlighted shortfalls and surge capacity challenges for certain weapons and munitions. COVID-19 created or exacerbated problems with supply chains, distribution systems, access to materials, and workforce shortages. As this article is written, the Defense Department (DoD) is working on implementation guidance for its recently released industrial base strategy. 

All this attention focuses on the need for strengthening the industrial base. Yet, efforts largely ignore half of that very industrial base – the services half. 

It’s past time to expand the aperture, look at the key roles played by the services industry, and strengthen the services industrial base by focusing on those roles. 

To be clear, this limited view of the industrial base is not new. When the Packard Commission1 convened in 1985, it focused primarily on the systems and processes that designed and produced major weapon systems. The commission’s final report paid far less attention to sustainment, logistics, and support, even though over the life of a weapon, the costs of that support far outweigh the costs of design, development, and production. 

The Evolution of Defense Services 

In part, the realities of the Cold War drove the Packard Committee’s focus. Plans, exercises, and war games regularly showed that a land war in Europe with the Soviet Union and its Warsaw Pact allies would reach a tipping point within a few weeks of a Soviet invasion. There were few scenarios in which services and support became a decisive factor in the war’s outcome. 

The Berlin Wall and the dissolution of the Soviet Union changed this planning construct. By 1993, the focus of DoD, the White House, and Congress was shifting to “dual-use technology.” At that time, the term meant technology developed originally for defense purposes, using DoD research and development (R&D) funding. “Dual-use” meant that research results were spun off to the broader commercial market. 

Today, that dynamic has reversed. Dual-use efforts now focus on capabilities and technologies built for commercial use and subsequently applied to national security requirements. Private sector capital—including venture capital--is flowing to support such dual-use efforts. The last five years has reportedly brought investments of up to $100 billion in startups.2 

The Data 

The federal government collects data on funds obligated to contracts and reports those data in the Federal Procurement Data System (FPDS). At PSC, we analyze those data and make the results available to our member companies. 

Since Fiscal Year 2008, DoD contract obligation totals for services has exceeded the totals for products. In Fiscal Year 2023, the latest year for which full-year data are available, DoD contract obligations for services were more than 10 percent above obligations for products. 

In addition, DoD today can and does procure much of what it needs as a service rather than through ownership of a product. Gone are the days of owning every server on which data are stored - cloud services contracts are cheaper, faster, with more available data. There are many more examples of this shift, from software-as-a-service to buying space launch services rather than buying the launch vehicle itself. 

Services as Part of the Industrial Base 

Still, DoD has not taken full advantage of these changes, either the capabilities developed for the commercial sector or the opportunities to buy results as-a-service. Focusing on using that advantage offers real promise to support an industrial base with resilience, innovation, flexibility, and surge capacity. What changes can make that shift happen? 

Perhaps the greatest barrier to increasing the use of services as part of the industrial base is that was not past practice. 

Gone are the days of owning every server on which data are stored - cloud services contracts are cheaper, faster, with data that are more available. 

In DoD, as in much of government and business, the past is stronger than the future. Contracting officers are not incentivized to take risks and pursue something different that diverges from past practice. 

Changing that starts with better requirements, the basis for every contract. What does the government need? Done right, the answer to that question will focus on results and outcomes. Evaluation of proposals will be built on an understanding of the value of those results, not just the cost. 

The absence of such requirements is one of the main barriers to a stronger industrial base with greater innovation. In a recent presentation to an audience of defense contractors, I asked for a show of hands: who had proposed some innovative solution to a DoD customer, only to be told that DoD does not have a validated requirement for that innovation? At least a third of those in the room raised their hands. That sample is consistent with similar requests over the years, and it may well reflect both the opportunity and the difficulty of using as-a- service to strengthen the industrial base. 

Conclusion 

If DoD wants a 21st-century industrial base, it needs to become a smarter customer, one that is more aware of the potential to procure results through services as well as products. It can do that by focusing on results and outcomes, not input measured in labor categories and labor rates. In the next issue of Defense Contractor, we will explore some ways this can be accelerated.